What to Do if You Can’t Make Payroll
Managing cash flow — essentially money moving in and out of your business — can be arduous. Even though you're bringing in sales, you may not have collected on invoices, leaving you short of cash to pay your bills, or even make payroll. You may also feel financial strain as a result of the COVID-19 pandemic, and struggle to stay afloat while continuing to pay your staff. No matter the financial situation your business is in, paying employees is vital. Payroll isn’t only a legal obligation, but it’s also a promise to employees and their families that they'll be fully compensated on time. But disruptions specific to the business and the business landscape at large can derail the best-laid plans and cause employers to worry about meeting payroll. Read on to learn more about how you can anticipate payroll problems, how to keep employees paid even if you hit a roadblock, and solutions that can help you meet payroll obligations — even if you’re in a cash crunch.
Anticipating payroll problems
A big payment due from a customer is late. A restaurant faces a sudden spike in food costs. A hair salon must reduce its operating hours due to COVID-19 restrictions. When these or other unanticipated events impact the cash levels in your bank account, you still need to make payroll and pay associated taxes on time. How can you anticipate the unanticipated? You can't control the unexpected, but there are ways to scrupulously monitor cash flow to be sure you'll have the money to meet payroll.
Watch your bank account
Keep your eye on what's going on daily by using tools to help you monitor your cash flow. For example, you can get reminders about upcoming bills so you can check whether there's cash on hand to make these payments or take steps to address the shortage.
Check your metrics
There are certain equations that financial professionals use when assessing cash flow. For example, look at the "days sales outstanding," which measures how long it takes for you to collect on receivables (the shorter the better). Your accountant can help you run the numbers.
Forecast cash flow
This measurement projects sales and expenses based on your prior history. Compare it to your actual cash flow to see the direction in which your company is moving. This comparison can detect changes that may be worrisome to cash flow down the road.
How to pay employees when you can't make payroll
While monitoring cash flow is a proactive way to ensure you can pay employees, you may reach a point where you’re considering whether you can defer payroll. In such a case, consider the following potential ways to remedy the situation, and know that the consequences of missing payroll can have far-reaching and long-lasting negative effects.
Prioritize payroll obligations
Watching cash flow is a good place to start, but it’s only part of the solution for ensuring you can pay staff every pay period. Prioritize your cash outflow to help ensure there is money on hand to pay your workers, as well as payroll taxes.
When it comes to payroll, two costs are a priority:
- Employee paychecks: Under the Fair Labor Standards Act, employers are obligated to pay employees for hours worked on regular paydays for the pay period covered. Similar state and local wage payment laws also require employers to pay employees promptly.
- Payroll taxes: These taxes fall into two categories: employer taxes and trust fund taxes (employees' income tax withholding and their share of FICA). Employers delinquent on their employment taxes (the employer share of FICA, FUTA taxes, and state unemployment taxes) are subject to interest and penalties. Owners who fail to pay trust fund taxes can be 100% liable for the money.
Other essential payments you may have include:
- Utilities and rent: Running your business without electricity or Internet access can make it nearly impossible to get anything done, so it’s important to keep up with these payments.
- Aging payables: Bills that are more than two months overdue can greatly lower your credit rating and make it more difficult to obtain financing.
- Suppliers and vendors: If you're a retailer, restauranteur, wholesaler, or manufacturer, you need to stock your shelves to stay in business. You may be able to work out special financing terms with these parties if you've been a good customer in the past.
Beyond these essentials, review insurance policies, some of which are mandatory (e.g., generally workers' compensation, vehicle insurance) while others may be discretionary, but highly advisable (e.g., liability insurance). Before canceling a policy, work with your agent to see whether you can improve cash flow by reducing premiums or by increasing deductibles, limiting coverage, or making other policy changes to make the coverage affordable. And if the business has credit card debt, try to pay the minimum due each month to preserve your credit rating.
Do everything you can to avoid delaying or reducing payroll
It’s important to understand what happens if a business does not pay its employees or payroll is late. A delay, reduction, or refusal to pay employees may result in lawsuits, legal action, and fines. For example, you may face fines from government agencies if you don’t remit payroll taxes, and an employee can file a lawsuit against the business for unpaid wages. In addition to financial consequences, there’s your relationship with employees to consider. Once an employee is either paid late or not at all, this can dissolve their trust in the business and possibly even lead to them quitting.
Notify your employees of a payroll issue
The inability to make payroll and meet the financial obligations listed above are serious issues a small business can’t afford. Employees should be notified upfront if there is an issue (they shouldn’t be left wondering where their check is on pay day), and you should communicate the steps you are taking to remedy the situation, including timeframes for addressing the issue. Keep in mind that delaying payroll should be the last possible action you take.
Consider liquidating assets
If you find yourself in a situation where there’s no capital available to meet your financial obligations, including paying employees, you may want to consider liquidating assets. Liquidation can be part of ending business operations, but it can also mean selling off inventory and assets to satisfy creditors. In this case, assets are first distributed to secured creditors (e.g., banks), followed by unsecured creditors, which includes employees who are owed money.
Seek alternative forms of capital
There are many forms of small business financing, including help for businesses as a result of the COVID-19 pandemic. You should consider talking to your financial advisor for the best option. Depending on your situation and how quickly you need access to capital, particularly if you’re struggling to make payroll, there are some options to consider:
- Taking a discount on your receivables: To get emergency payroll funding, consider accounts receivable (A/R) discounting in exchange for cash balances. When you do this, you sell unpaid outstanding invoices for a cash amount that’s less than the value of those invoices.
- Securing hard money lending: A hard money loan, which is commonly issued by individuals or private investors, is short-term, asset-based financing, where you use property as collateral against the loan.
- Using merchant financing or merchant cash advances: As a means of alternative financing, you can consider merchant funding, which uses your credit card processing system to pay back money loaned. With each credit card transaction, the merchant financing lender takes a daily percentage of your transactions as a form of repayment. This continues until your loan and interest are fully repaid.
- Selling stock at a significant discount: Selling company stock shares at a discount can help you raise money if you have a short-term need for capital to pay employees. In this scenario, buyers purchase ownership shares at a discount for less than the business’s current market value. While you as the owner lose some ownership (depending on the amount of ownership stake purchased), selling stock at a discount doesn’t require you to take on new debt.
Finding cash in a crunch
You may also be able to avoid a future cash crunch by partnering with a reputable payroll services company such as Paychex that offers the subscription-based program Paychex Promise®1, which provides a number of payroll solutions, including:
- Payroll protection: If you are having temporary cash-flow issues, payroll protection extends the collection of payroll funds from your business bank account by up to seven days without service interruption or insufficient fund charges.
- Same-day ACH: Last-minute payroll processing for issues such as forgetting to process payroll or having to pay a terminated employee on the same day can be costly. Paychex Promise customers can process up to two same-day ACH requests each subscription year at no additional cost.
- Small business loan center: Get access to lending options through external lending partners so you can obtain funding for other business needs and thus be able to meet your payroll.
Meet your payroll obligations with confidence
Disruptions such as the COVID-19 pandemic can derail even the most prepared businesses and take a toll on finances. No matter the challenges you face, the failure to meet your payroll obligations can get you in serious financial troubles and destroy your relationship with employees. Look for warning signs that could jeopardize your ability to meet payroll, and act immediately so that your employees get paid on time, the government receives employment taxes, and you stay out of trouble. If you’re struggling to pay employees and dealing with issues as a result of the pandemic, visit our COVID-19 Help Center.
1Program and/or any of the services offered as part of Program are subject to eligibility and are void where restricted by law.